By Tiernan Ray

The OpenStack Summit industry conference for the freely available, open-source software program of that name is going on this week in Atlanta, and among the attendees has been Mizuho Securities USA’s Abhey Lamba, wrote in with his thoughts today on what the event means for Red Hat (RHT), which builds a business distributing and supporting the software for its customers, as well as VMware (VMW), whose business will be affected by OpenStack’s virtualization, and for EMC (EMC) and Hewlett-Packard (HPQ).

While a lot of activity is in test beds at the moment, Lamba writes that interest is clearly on the rise, in particular because the revelations of Edward Snowden about NSA spying is prompting some companies to build more private clouds as an alternative to public data centers such as those offered by Amazon.com (AMZN):

We attended OpenStack Summit in Atlanta today. The event clearly highlighted high levels of interest among various vendors and large organizations to support the technology or to benefit from it while deploying applications that require a scalable infrastructure. During the event, vendors of all sizes ranging from small start-ups to large enterprises like IBM, Cisco, Red Hat, Rackspace etc. showcased their offerings and highlighted their differentiation versus others. Although the technology is still in a nascent stage, the interest level is extremely high with current deployments primarily limited to development and test environments. Many vendors believe 2015 could be the year of strong acceleration in bookings/revenues from the technology when customers start using it in production workloads [...] OpenStack offers time to market benefits for vendors looking for scalable computing environments that can be brought online or taken down fairly quickly. Such solutions are highly useful in media related applications on the Internet or big data analytics in addition to supporting development and test environments universally. Additionally, the technology offers an on-premise alternative similar to Amazon’s scalable infrastructure, which many large enterprises are exploring as a direct impact of recent data leaks by Snowden. Many vendors pointed to the “Snowden effect” as a driver for a strong interest in OpenStack solutions since many large customers now want to keep most of their critical data in-house versus relying on public clouds. OpenStack offers a reliable alternative to support such deployments. The most recent Icehouse release of the product includes some of the key features like high availability, and charge back capabilities that were required for broader adoption among enterprises. Most users and vendors that we spoke with were excited about the new feature set included in the release and believed that OpenStack adoption should experience a boost from the new version.

Lamba, who rates Red Hat stock a Buy, sees an obvious advantage for the company:

Although there are multiple flavors of OpenStack and deployments are based on competing solutions, Red Hat should gain once customers start pushing the technology into production. The company’s leadership position in Linux with it being the largest contributor to OpenStack should help its differentiation. We expect the company to beef up its consulting capabilities to help jumpstart its customers. While we do not expect meaningful contribution from the technology in FY15, combined with the RHEL 7 launch, it should help accelerate bookings growth in FY16 with revenues following.

The free virtual machines that come with OpenStack are a threat to VMware’s software over time, perhaps, but Lamba also has a Buy on its shares and sees immediate benefit in helping to roll out the software:

VMware supports OpenStack in a limited capacity by allowing it to work on top of its platform. Most of the service providers are unlikely to use VMware’s solution as base but private clouds will find benefit in building solutions on top of VMware due to its dominant position in data centers. However, given material cost savings offered by competing hypervisors and investments in alternatives, we would expect pricing pressure for VMware over time. In the near-term, the company has a potential to gain from its large installed base and greater attach of management & automation solutions within its current customers.

OpenStack is not going to have a meaningful effect on financials for either EMC or HP, but they may be able to help their existing businesses in enterprise equipment from investments they are making:

Some of the vendors at the summit highlighted the work being done by Pivotal as one of the key potential drivers for the adoption of OpenStack. While it remains to be seen how effectively EMC can leverage the investments in Pivotal, it does offer strong upside potential if their adoption grows [...] In addition to offering a hosted OpenStack version, HP is also offering specialized servers targeted at enterprise adoption of the technology. We do expect the company to keep gaining share in the server hardware market especially as IBM is transitioning its business to Lenovo.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.